Dollar Shave Club and the bull case for eCommerce

The cue for this post was Harry Stebbing’s 20MinuteVC interview with David Pakman, the partner at Venrock who led the Series A and Series B rounds at Dollar Shave Club and recently had his faith justified with a $1bn exit to Unilever.

He said that when he made those investments in 2012 and 2013 eCommerce wasn’t a hot sector with VCs and that remains the case now, but here at Forward Partners we’ve made a number of ecommerce investments and, like David and his partners at Venrock, think there will be more Dollar Shave Club scale exits going forward. We are happy investing in sectors where we see opportunity, even if others don’t.

If you poll investors for reasons not to invest in eCommerce you will generally hear three things: low margins, low multiples on exit and high working capital. Some will also throw in the threat of competition from Amazon for good measure.

These are all great points. There are plenty of eCommerce companies where these characteristics are risks and realities. Great care is advisable before investing in them. Without some extra bit of magic they will be unlikely to achieve huge exits.

But there are also eCommerce companies that escape some or all of these issues and many of them are good investment prospects. Here are three reasons why:

Consumers are hungry for direct relationships with the brands they buy. That’s part of the story behind Dollar Shave Club, Nike, Apple and many other iconic brands today. However, most traditional brands (think P&G, Unilever, much of traditional fashion) have never dealt directly with their customers and don’t know how. Meanwhile sales through their traditional retail channels are falling fast: creating the opportunity for upstart brands to steal significant market share. These direct-to-consumer eCommerce brands are often able to leverage their relationships and data to win on the basis of superior product. Example companies: Dollar Shave Club, Bonobos, Warby Parker and amongst our partners Spoke and Lost My Name.

Few traditional retailers are nailing it online. Their skills of supply chain management, curating a catalogue of product to fill their shops and in store merchandising are less important in the current online and omnichannel era. Today, inventory can be an order of magnitude larger and there are huge opportunities for curation and re-imagining supply chains. All the while, declining High Street revenues and high fixed cost bases are starving them of cash to invest in innovation. In their place what you might call eCommerce 2.0 businesses are offering consumers compelling personalised selections from massive inventories with marketplace, no-stock or stock-light models. They are able to scale rapidly and go global quickly. Amazon is the proto-typical example in this category, others include Jet.com, ASOS and amongst our partners Thread.com, Live Better With, Hubbub and Patch.

Consumers have a range of preferences, styles and budgets and it’s hard to picture a future in which we don’t buy from a range of online retailers. Shoreditch locals don’t want to shop in the same places as investment bankers a mile south of here. As you might have read on this blog I have a ton of respect for Amazon but they aren’t going to take the whole market. In particular they aren’t good at the product categories where people don’t know what they want and traditionally look to retailers to help them make choices.

Online penetration of retail is now pushing 20% in the UK, so there is still a long way to go in this market. In his interview David said that after little interest in Series A and Series B rounds at Dollar Shave Club the Series C and Series D rounds were hotly contested. I think we will see a similar turnaround in investor appetite for eCommerce more generally.